Examination of Witness (Questions 980 - 999)
TUESDAY 28 APRIL 1998
MR JOHN
KELLY
Mrs Williams
980. Can you perhaps clarify and be more specific for the
Committee on where you source your UK meat? I see, on page 3,
the heading "Source of Raw Materials". Do you buy Welsh
lamb and Welsh beef? If so, how much do you buy?
(Mr Kelly) In Dawn Pac we buy Welsh lamb from Welsh
Country Foods in Anglesey, and we slaughtered some Welsh lambs
in Bedford. Of the 20 tonnes of lamb we buy for Dawn Pac, about
half is Welsh.
981. About 10 tonnes?
(Mr Kelly) A week, yes. The rest we take from our
own in-house plant in Bedford and it may or may not be Welsh.
982. Which would be another 10 tonnes, in Bedford?
(Mr Kelly) Roughly. From either in-house or from one
of the supermarket group's suppliers that we have a list of.
983. What about beef?
(Mr Kelly) We would try to keep it 100 per cent in-house
but it is something like 80 per cent—from our own plants.
About 80 per cent from our own plants.
984. During your introduction you mentioned, I think, your
own plants. Can you remind us again?
(Mr Kelly) Where are they?
985. Yes.
(Mr Kelly) One in Scotland, one in Bedford, one in
Yorkshire.
Chairman
986. Just to clarify on the sourcing of the meat, you are
saying that would be UK sourced?
(Mr Kelly) Yes, our own UK plant, yes.
Mr Llwyd
987. Mr Kelly, on page 3 of your submission you stated that
your sourcing policy (and I am quoting now) "is dictated
by our customers and our Group obligations". Could you possibly
expand on that statement, and could you tell us to what extent,
if any, do the retailers dictate where you purchase your meat?
(Mr Kelly) They dictate it 100 per cent. We can only
buy from their approved suppliers, and if all of our plants are
not approved they would give us a list of other approved suppliers
that they would allow us to buy from. So they dictate it 100 per
cent.
Ms Lawrence
988. If we can turn to margins, you say your margins have
ranged from a -0.4 per cent to 1.1 per cent net.
(Mr Kelly) Yes, in the five financial years that Dawn
Pac has been trading.
989. On paper it looks hardly worth the investment. Can we
assume that, perhaps, it contributes to higher margins elsewhere
in your group?
(Mr Kelly) The meat industry in general in Britain
is probably anything from zero to an aspiration of about 3 per
cent net. In Ireland it is from 1.5 per cent to an aspiration
of maybe 4 per cent net. That is the industry we are in. It is
a huge turnover/low margin business. The values are big but the
margins are low.
990. Can you tell us how you establish your prices, firstly
with your suppliers and, secondly, with your retail customers?
(Mr Kelly) It should be a lot more scientific than
it is. We would work out what we believe each cut is worth in
the marketplace, and then we look at what homes we have for those
individual cuts. That varies according to the season. For example,
in the summer time you will not sell much forequarter meat but
you will sell a lot of steak meat. In the winter time you would
sell forequarter and top end meat. So the values are constantly
changing. You work out what you think you can afford to pay for
cattle or lambs, based on what you think you will get for the
product—assuming that you will sell all the product at that
price (which you may not, because supermarkets unfortunately do
not buy in balance). So that is what we can pay for cattle or
lambs. The other side of it is what is the marketplace doing in
cattle and lambs. If someone has a particularly good job for beef
locally—a competitor of ours locally—he may be paying
a lot more than, say, someone 200 miles away who has not got an
equally good customer. So it is what you think you are going to
get for the meat on the sales end and what you are going to have
to pay for cattle on the other end. It is largely cattle-price-driven
rather than sales-price-driven, because, at the end of the day,
the price of cattle is dictated by the 450-odd abattoirs in Britain.
So we are by no means able to control the cost of the raw material.
When we see what the cattle are going to cost us, we say "Right,
we have to get a bit more for beef", which we may or may
not do, depending on the customer, because some of them may be
priced for six months, three months or one month. So it is not
scientific, is what I am trying to say. It is a decision taken
almost on the week or on the day; on what you think you will have
to pay. Also, if you are trying to kill 1,000 cattle a week in
an abattoir you have to go out and get 1,000 cattle, and you will
not be dictating the price because there are so many market forces
dictating it.
991. You have described some of the factors which affect
prices, but can you perhaps expand on the extent to which pressures
from above—ie retailers—control the price that you
actually pay your suppliers? You have described the pressures
from the bottom and the pressures from the top, but to what extent
does pressure from the top determine what you actually pay?
(Mr Kelly) Without bad-mouthing any of my customers,
supermarkets control 65-70 per cent of the market in retail, and
retail is about just under half of the total consumption. So they
have a huge influence on what we can pay for cattle, because,
at the end of the day, they are the ones we are selling the beef
to. It is huge, but I could not specify it any more than that.
If we got more for the beef we could pay more for the beef, but
we are not going to push too hard to get more for the beef because
there are 450 abattoirs out there as well as us who would equally
do it cheaper—in the days of rationalisation of supermarkets.
It is a very competitive business because of the over-capacity.
Mr Paterson
992. On page 7 you call for "an immediate structured
rationalisation of the slaughtering sector" cutting the number
of abattoirs from 450 to 40. Why?
(Mr Kelly) Because there are 2.2 million cattle killed
in Britain this year and 1,000 is a reasonably efficient number
to be killing in your average abattoir. Forty-odd abattoirs at
1,000 each could do the lot. That, to me, makes a lot of sense
in terms of the way that supermarket forces are driving a smaller
and smaller number of retailers. Even the catering sector—the
food services sector—is becoming more and more rationalised
as well, so you have fewer people to deal with. About 1,000 cattle
a week I think would be an efficient number and we would have
some control on both sides of the equation, but particularly strength
with customers.
993. What sort of control?
(Mr Kelly) There would not be 439 other people—or
whatever it is—able to come in and quote prices the same
week that I was quoting prices.
994. Do you not think more people offering the better? The
more competition the better?
(Mr Kelly) From my point of view, no.
995. Are you trying to establish a cartel?
(Mr Kelly) Definitely not. The business is inefficient
and margins are very low. It would be better if there were 40.
In any market 40 is a big number. There is still plenty of competition,
but there should be more margin in it.
996. What do you think the marginal improvement in cost would
be on wholesale meat?
(Mr Kelly) I do not know. I would have to come back
to you on that.
997. Could you?
(Mr Kelly) I could, yes.
998. How much more efficient would one large abattoir be—one
of your 40—compared to the 450?
(Mr Kelly) You also have to remember that it is not
in our interest to have a weak farming community. I am 39 and
I want to be in the meat business when I am 60, but if farmers
go out of business—which is the way it is heading very rapidly
in Britain—beef will be an exclusive, niche product that
everyone will be paying through the nose for, if they bother,
and supermarkets will not have a margin out of it, which means
they will lose interest in it. There is a big picture there, but
rationalisation, I think, will help to strengthen the situation
and the industry. And not just from our point of view.
999. What role would the livestock markets play?
(Mr Kelly) In Ireland 98/99 per cent of the cattle
slaughtered are brought direct from farms, and I think it is a
much better system, but then I might be biased in that. What role
do the auction markets play? They play a useful role in the farmers'
eyes in that they bring it to market and there are buyers there
and they think they are getting a better price for it. But, in
fact, if it goes through a retail scheme or a traceability scheme,
or something else, they would probably get more by avoiding the
market. Markets exist in Britain, they are a big force in Britain,
but—and this is a personal comment—I am not convinced
they are the way forward for the beef or the lamb business, and
an even higher percentage of lamb goes through the markets than
beef. That is a personal view, not an informed view.
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